The Impact of Geopolitical Risk on Risk Contagion across Major Asset Classes

In recent years, geopolitical risk has been rising. Numerous studies discuss the impact of geopolitical risk on individual asset classes or risk contagion in different asset classes through external shocks such as COVID-19 and financial crises. Motivated by these, this paper adopts the Granger causality test to explore how geopolitical risk can impact the pattern of risk contagion across asset classes including stock, bond, foreign exchange, and commodities from a global perspective. The outcome implies that geopolitical risk has little impact on the pattern of risk contagion across the asset classes. However, an intrinsic connection exists between asset classes, which is visually presented. First, the crude oil market is relatively independent, so systemic risk can be reduced for portfolios by taking crude oil futures. Second, the safe-haven effect may diminish because risk transmits from the bond market to the foreign exchange market and gold market. Third, the stock is the most important in transmitting contagion among the selected asset classes, so the stock market should be prioritized for monitoring and stimulation.